Author: Melissa C. Martorella, Esq.
Lenders are typically responsible for drawing up a loan contract to detail the commitments of a loan agreement with borrowers, from how funds will be used to exactly how and when they will be repaid.
When it comes to real estate lending, these agreements can be complex and often require more than a simple signature from the two main parties involved in the transaction. Here’s a guide to the different roles of different people involved in a loan and their associated obligations:
A lender is the individual or entity providing all or part of the funding for a loan. The lender also determines the terms for repayment.
A broker is the person or entity that, for a fee, facilitates a transaction tied to real estate or a business opportunity through negotiation or through actions like selling, leasing, assisting, or soliciting. The broker usually serves as the intermediary between the lender and the borrower.
A loan servicer is the person or entity that prepares mortgage statements, collects loan payments, and keeps track of what has been paid and what is left outstanding.
A borrower is the person or entity borrowing the money from a bank or private lender. They are the center of the transaction because they are the one taking out the loan. They may also be called a principal borrower. If the borrower is an entity, the entity cannot sign for itself because it is not a human – for LLCs, the signor is typically the manager or managing member; for corporations, the signor is typically the President or the Secretary; and for trusts, the signor is the trustee.
A co-borrower is the person or entity who assumes financial responsibility for the loan alongside the borrower. Their name appears on the property title and they are jointly responsible with the borrower for repaying the loan in full.
A co-signer, often a family member,is a person or entity who may sign onto an agreement to help the borrower qualify for the loan or secure a lower interest rate. They are also fully responsible for the loan, and they provide an added layer of protection for lenders. Unlike co-borrowers, however, a co-signer’s name would not appear on the property title.
A guarantor is similar to a co-signer with a degree of separation. It is the responsibility of this person or entity to pay for the loan. This kicks in only if the borrower defaults or misses a payment and the lender is unable to collect.
A reference is a person who can verify a borrower’s identity and basic personal information to help avoid loan fraud or provide an alternative point of contact if the borrower misses a payment. References are not legally bound to the loan or financially responsible for repayment.
A witness is a person present to confirm the contract was agreed upon and willfully signed by all parties. Similar to the role of the reference, a witness is not legally bound to the contract in any way. Their role is to be a neutral third party in the event of a dispute. Witnesses must be 18 years of age, of sound mind, and must not benefit from the transaction in any way — so adult children and legal representatives are usually off the table. Some states may require a witness plus a notary professional to be present at signing, while other states may allow the notary professional to act as the witness.
As lender, you should understand these roles so that you know who is legally and financially responsible for repaying you. It is important that you understand what role each party is playing so that your loan documents are drafted in a way that strategically binds the parties to ensure you are repaid. We would be happy to discuss the facts of your loan with you and to help you figure out what role each party should play. If you would like to discuss, please reach out to our Banking and Finance Team.